This China Center members-only chart shows the overnight interbank bond repo rate in China and the 7-day repo rate, respectively. In the week of June 3rd –7th, both rates shot up, signaling a sudden tightness in liquidity within the banking system – risks of which we recently highlighted. In fact, the overnight rate jumped higher than the seven-day rate, causing an inversion in the yield curve and indicating a significant credit crunch – i.e. that banks needed cash immediately.

The event highlights the liquidity risks that such a highly leveraged system faces – especially one where companies are increasingly borrowing in the interbank market and on-lending into the shadow banking sector. This serves to tie the fates of the corporate, shadow banking and formal banking sector together.

We suspect that the sudden liquidity shortfall was brought on by a combination of four factors. Please download the full chart for details.

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